The Basics: Negotiating A Contract? Misrepresentation Or Just Exaggeration?

Many things can be said when a contract is being negotiated. Some things become terms of the contract, others will be recognised as mere sales talk or harmless exaggeration. However, some statements may be representations, statements of opinion and other statements which, while not terms of the agreement, will induce a party to enter into a contract.

Whether a statement becomes a term of the contract or remains a representation is very important. The remedies available for breach of a contract term are different to the remedies that may be available if the contract was entered into as a result of a misrepresentation. It is important to understand what can amount to a misrepresentation, the consequences for a representor when a misrepresentation is made and any remedies available to a party who enters into a contract as a result.

What is a misrepresentation?

A misrepresentation occurs when:

an untrue statement of fact or law is made by one party (A) to another party (B); that untrue statement induces B to enter into a contract; and B suffers loss as a result. Misrepresentations can:

arise as a result of express written terms or oral statements; be implied by words or by conduct; occur when plans or projections are made for the future; be the result of half-truths; or happen when a statement was true when made, but later becomes untrue when circumstances change - Party A will have a duty to update/revise his or her statement, unless it is clear to the recipient of the information that A accepts no responsibility for its accuracy or for reviewing it. What are the different types of misrepresentation?

Fraudulent misrepresentation

Fraudulent misrepresentation will occur when a false representation is made and the party making the representation (A) knew it was false or was reckless as to whether it was true or false - the lack of an honest belief in its truth will make it a fraudulent one.

If A honestly believes the statement is true it cannot be a fraudulent misrepresentation, negligence in making a false statement will not amount to fraud. However, if it can be shown that A suspected the statement might be inaccurate or wrong, but made no enquiries to check the position, that will be enough. It will not be necessary to prove a dishonest motive.

Negligent misrepresentation

A negligent misrepresentation under the Misrepresentation Act 1967 (MA 1967) occurs where a statement is made by one contracting party to another carelessly or without...